Saving for College – An Exercise in Depression

My friend from Rich Credit Debt Loan asked me a simple, but thought-provoking question last week. I’m probably going to tease you with the actual question for a little while. We decided the best answer for the question was to create a calculator and I haven’t had the time to do such a thing. However, the question centered around his plan to save enough money to put his children through college.

In order to answer any question like that, you have to start by gathering information. “How much would tuition be now?” was a key question we had to answer. Often, you can’t know where things are going if you don’t know where they start. Then we looked to how long he had to save for his children. Then we tried to model how his investments would perform over that span. Lastly we searched the web to see how much college costs are likely to go up while his kids grew. The sobering fact hit us over the head… hard. We found a few sites that estimated costs to go up between 6 and 9%… which was exactly what we estimated as the growth on his investments. In other words, compound interest isn’t likely to help him save for college.

There’s some debate about whether putting a child through college a parent’s responsibility. No matter which side you are on with that debate, I found it refreshing to see someone plan their finances far in advance. It makes me wonder what those who aren’t thinking 10 to 15 years ahead are going to do when college comes around. I know there are always loans and scholarships, but wouldn’t it be nice to not have to think about that?

I wish Rich Credit Debt Loan some luck on whatever path he chooses. It looks like he’s going to need it.

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Comments

That’s not quite true. If you have an expense that is increasing at 9% per year, it’s better to have a corresponding asset that increases at 9% per year than money that is sitting idle. 9% – 9% is better than 9% – 0%.

I don’t think it’s a horrible idea to have kids shoulder some of the cost. My parents weren’t able to put a dime toward my education, and I worked out OK. Also, while college costs are on the rise, so are salaries in a lot of fields. Hence the capacity to repay student loans will increase.

To expand further … I’ll use an analogy. Your boat is taking on water. You use a bucket to bail out water. The water level inside the boat remains the same – you’re bailing out water at the same speed that it’s rushing in.

Is your bucket preventing a hurt, or actively helping? I see it as a matter of semantics. Regardless of how you phrase it, it’s preventing your boat from sinking.

Yeah, it’s preventing from sinking, but it isn’t actually moving you forward towards your (presumed) goal of having a boat that is seaworthy.

It’s quite a good analogy and I think it captures the point I was trying to make here. With other areas of inflation being a historic 3-4%, a 6-9% investment return is actually a gain. With college expenses it seems like it’s more treading water.

There’s some question as to whether education costs will continue to rise in excess of inflation. If the current increases continue, a 4-year undergraduate degree will cost over $150,000 within the next few decades. At that point, a college degree doesn’t make financial sense since the increased earning capacity won’t be enough to offset the ridiculous up-front cost. Aside from that, $150k is way beyond what 95% of families can afford for their children’s college education.

Something has to give, and my guess is that there’s a bubble forming in college tuition costs – at some point it’ll pop and prices will drop to more reasonable (and affordable) levels.

@Lazy – I guess it’s all relative. I was comparing the the alternative, which it’s an improvement from. Compare to the ultimate goal and it’s not.

@George – A few decades from now, $150,000 won’t be as much money as it is now, because of time value of money. At a 6% discount rate (which may or may not be appropriate), the NPV of $150,000 24 years from now is $37,500 in today’s dollars.

I see what George is saying. A long term 6-9% rise in expenses for colleges may not actually come to fruition. However, some of our quick research found that some people are predicting it. It seems wise to prepare for the worst case scenario.

I graduated from college three years ago and my parents didn’t pay any of the tuition (they did help out in other ways – paying the car insurance, etc). A little of it was paid for by Uncle Sam, a little came from working on campus, and most of it was through loans.

From my own experiance, I can tell you that those who actually paid their own tuition seemed to get better grades and take their studies more seriously than those who’s parents paid for it. I mean, if I am paying $15,000 of my own money for a year’s worth of college then I want to get my money’s worth.

Donnie, that’s a solid point. I think my wife would say that she got more out of her college as it was on her own dime. I thought that debate was outside of the scope of what I wanted to say this article though.

I echo Donnie’s sentiments. My first year of college was very rough (I sailed through high school and as a result had lousy study skills). The fact that I was spending my own money was definitely incentive to get my money’s worth.

This also manifested itself later in my college years, when I took classes that maximized the value of my education, rather than simply fulfilling a requirement. Instead of the US History that the majority of people took to satisfy the history requirement, I took Chinese history. The course was much more difficult, but I learned a lot more (since I knew virtually nothing at the beginning of the class :)

Sure, saving for college is a daunting task, but isn’t saving something better than giving up all together? I’d say “Yes!!” (although I may be a little biased as I do represent the prepaid tuition program in Illinois).

Hands down, one of the best ways to combat the ever-inflating cost of college is to look into 529 prepaid tuition plans. Save for a portion of your child’s education this way and have them pay for the other portion.

I know people both ways. I would have not made it through college without my parents. I would have quit. Thirty years later I am still teaching middle school.
On the other hand- my daughter blew through her money for college in three years—and 29 credits! What a waste of money.
My son went to a military college- so he paid his own way. He finished in four years(which is the ONLY way you finish there).
Still wish my daughter would go back- she is 26. It doesn’t look good….

Unfortunately, more money (whether loans or 529 investments) chasing college simply inflates the cost of college. But this is not something you can get people to voluntarily opt out of because everybody looks out for their own best self-interest.

Not sure what the answer is.

BTW, the prepaid plans are dangerous. They basically are guaranteeing future costs at today’s prices. I foresee either bankruptcy or the state taxpayers footing the bill. Or some combination where you only get back the money you put in and the promises that were made — oh well, better luck next generation. We already are seeing this happen amongst various state programs (google Texas Tomorrow Fund).

Like most of parents, chances are that you could be thinking about paying for your child to earn a college degree. Whether you are thinking about paying for your child to earn an associate’s degree. There are many things that you should be sure to consider, right now, if you plan on contributing to your child’s education.

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